The belief that student loans are never dischargeable in bankruptcy is, simply put, not true. Student loans can be discharged in some limited cases. In fact, according to a study published in 2011 by Jason Iuliano, a student at the Woodrow Wilson School of Public and International Affairs at Princeton University, at least 40% of borrowers who include their student loans in their bankruptcy filing end up with some or all of their student debt discharged.
The problem, as Iuliano points out, is that only about 0.1% of consumers with student loans actually try to include them in their bankruptcy proceedings.
While we're not advocating for shirking your legal responsibility to repay money you've borrowed, bankruptcy is sometimes a necessary part of our financial lives. If that's the case for you, you could be eligible to include any outstanding student loan debt within your bankruptcy filing. Here's how.
Is Bankruptcy Your Best Option?
Bankruptcy is an available option for a reason, so if you find yourself at the end of your financial rope, don't be afraid to consider it. A consumer bankruptcy attorney can help you understand how filing for bankruptcy may help you. You may also want to talk with a credit counseling agency to ensure you've exhausted your other options, because bankruptcy can have a devastating impact on your credit scores that will take years to improve.
Do You Pass the Brunner Test?
Bankruptcy law currently exempts education loans and from discharge unless not doing so would cause the consumer undue hardship. But undue hardship is not defined, so individual courts are left to decide what that entails.
Most courts (but not all) use the Brunner test to determine undue hardship, using three criteria to do so. First, can the borrower sustain a minimum standard of living while continuing to pay the loan? Second, will the borrower's financial situation improve in the future? And third, has the borrower made a good-faith effort to pay his or her loans?
If you can answer no to all three of these questions, you may wish to discuss with your bankruptcy attorney whether you should file an adversary proceeding, which is basically a lawsuit within the bankruptcy case itself. And remember, even if you don't meet the Brunner test criteria, it might be possible to discharge your other debts, which can free you up to pay your student loans.
Review Other Discharge Strategies
If it's your student loans that are causing you the most concern, you might want to first consider some of the available student loan forgiveness programs available. Loan forgiveness programs are offered to everyone from Peace Corps and AmeriCorps volunteers to teachers, nurses, doctors and other young professionals serving communities in need. Professionals choosing to work such jobs may take home lower-paying salaries, but they'll also get some serious help with their student loans.
There are also many ways to get federal student loans forgiven. In fact, the Consumer Financial Protection Bureau released a report in 2013 estimating that more than one-quarter of working Americans are eligible for the Public Service Loan Forgiveness Program, but only a small percentage are actually using it.
Know the Impact On Your Credit
Whatever option you choose to rectify your financial situation, it's important to know how your choice will impact your credit. If you choose bankruptcy, there are steps you can take to avoid a long-term worst-case scenario, including:
- Make sure the bankruptcy is reported correctly. In order for the healing process to begin, make sure all the accounts included in your bankruptcy are marked as discharged and labeled with a zero balance on all of your credit reports. You can check your credit reports for free by pulling them at AnnualCreditReport.com.
- Start establishing a positive payment history. Payment history is generally the most important factor among credit scoring models, so it's imperative you demonstrate an ability to repay loans as agreed. One possible approach to re-establishing credit is to apply for a secured credit card and continually make all of your payments on time. You can also monitor your progress as you try to fix your credit by viewing your two free credit scores, updated each month, on Credit.com.
- Get the bankruptcy removed from your credit reports as soon as it's eligible for deletion. If your bankruptcy is appearing on your report after that 10-year mark, you can dispute its inclusion with the credit bureaus. You can go here to find out more about getting errors off of your credit reports.
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